Inefficient Peace or Preventive War?

TL;DR

This paper models how trade barriers can serve as a strategic tool to prevent costly trade wars amid globalization-induced power shifts, explaining persistent trade tensions and cooperation.

Contribution

It introduces a theoretical model showing trade barriers can stabilize peace by reducing incentives for preventive wars, with empirical insights from US-China trade relations since 1972.

Findings

Trade barriers can prevent trade wars by reducing expected payoffs for conflict.

Globalization-induced power shifts increase the likelihood of preventive wars.

Historical US-China trade data supports the model's implications.

Abstract

We study a model of two-player bargaining game in the shadow of a preventive trade war that examines why states deliberately maintain trade barriers in the age of globalization. Globalization can induce substantial power shifts between states, which makes the threat of a preventive trade war salient. In this situation, there may exist "healthy" levels of trade barriers that dampen the war incentives by reducing states' expected payoffs from such a war. Thus, we demonstrate that trade barriers can sometimes serve as breaks and cushions necessary to sustain inefficient yet peaceful economic cooperation between states. We assess the theoretical implications by examining the US-China trade relations since 1972.